Business finance: How to identify financial needs and advise your clients

This is a guest post by Funding Options

The business finance market has changed drastically over the last few years. Nowadays it’s not necessary to go to a bank for business funding: there are many non-bank providers and alternative lenders on the market, but a lot of business owners still don’t know about them.

As their accountant you can help clients understand and find business finance options that fit their needs. Let’s take a look at the key facts you and your client should know when looking for finance.

Look at every client’s individual needs

Every business is different, so every business will have different financial needs. Many people will only consider a business loan, then compare interest rates and choose the cheapest one. While this should definitely be part of the search, your client should try to keep an open mind, because there are many other types of finance available on the market, and some might be more suitable for their situation and business structure.

For example, is your client trading overseas? Or do they want to replace old equipment? Situations like these suggest that they could be suitable for a more specific product — there’s much more to business finance than just loans.

Maybe your client wants to use the finance to smooth out occasional cash flow gaps. In this case a revolving credit facility may be a good solution, because they work similarly to business overdrafts. The headline interest rates may be higher, but they often work out cheaper in practice, because your client can use them as and when they need it — interest is only paid on what’s outstanding.

You should also think about how your client’s business is structured: there are products specifically tailored for businesses that invoice their customers, for example, or for companies that use card machines to process payments. This opens up more solutions, where money can be lent based on outstanding invoices or the volume of sales through the card terminal.

There’s even finance for paying a tax bill. Look at your client’s situation and try to identify specific financial needs like these, because the purpose of the finance affects your client’s options, and one of the tailor-made products may work better.

Affordability and security

To assess your client’s affordability, many lenders will look at turnover versus the loan amount. For a regular business loan, the rule of thumb is that you might be able to borrow 10-25% of annual turnover. Of course the details will vary — a longer term will usually lower the monthly repayments and increase the total cost of the loan, and some lenders will focus on profitability instead — but you can use turnover to get a rough idea of what your client may be eligible for.

The amount your client can borrow also depends on whether they opt for secured or unsecured loans. The latter will almost always require a personal guarantee, which means instead of using assets to secure the loan, your client will be personally liable to repay the lender if their business defaults on payments. For this reason your client should think carefully before giving a personal guarantee, and consider speaking to a lawyer — in fact, some lenders will insist on it.

On the other hand, a secured business loan is based on the value of a specific business asset. For example, if your client’s business owns a piece of machinery worth £20,000, they may be able to borrow 50-75% of that amount. Affordability is still important, and with both types of loan the lender will want to assess the business’s overall financial position, but the emphasis changes when security is involved.

Trading history

When applying for finance, your client’s trading history will be an important part of the bigger picture. For most finance options lenders will want to see at least 2 years of trading history, because they need proof that your client will be able to repay.

If your client has been trading for less than 2 years, there are still some options available, but these options may come with a lower loan amount (or credit limit). For example, one of our customers had been trading for only a few months but needed finance to fulfil a big order from a high-street retailer. The lender was willing to offer finance in this case because having a confirmed order from a large, credible business lowers their risk significantly.

Common documents

If your client wants to apply for finance, you can help them by preparing the commonly required documents in advance. The faster your client submits the documents, the faster the process will be, and it’s often possible to have the money in their bank account within only a few hours.

Each lender will have slightly different requirements, but almost everyone will want to see the last 3-6 months of business bank statements. Limited companies should also have their latest set of filed accounts ready, as well as any other financial statements like profit and loss.

Whatever the specifics, the most important thing is to make sure your client’s financials are neat and tidy. If you help them prepare everything you can significantly accelerate the process, and the money could be in your client’s bank account within hours of applying.

Final thoughts

Advising your clients on business finance can open up new opportunities for you and your clients. One of the key facts is to identify the need for business funding and to help find the most suitable option for each client. When looking for options, your client should answer the following questions:

• How much money do they need?

• What is the funding for?

• How is the business structured?

• How long has the business been trading?

• Can your client offer security?

If you’re not sure what the best solution is for your client’s situation, Funding Options can help you with the search.

Conrad Ford is Chief Executive of Funding Options, recently described by the Telegraph as “the matchmaking website for small businesses and lenders”. Funding Options has been selected by HM Treasury to help businesses find finance when they’re unsuccessful with the major banks, as part of the Bank Referral Scheme that launched in November 2016.@FundingOptions